A random forest based approach for predicting spreads in the primary catastrophe bond market

01/28/2020

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by   Despoina Makariou, et al.

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We introduce a random forest approach to enable spreads' prediction in the primary catastrophe bond market. We investigate whether all information provided to investors in the offering circular prior to a new issuance is equally important in predicting its spread. The whole population of non-life catastrophe bonds issued from December 2009 to May 2018 is used. The random forest shows an impressive predictive power on unseen primary catastrophe bond data explaining 93 regression, our benchmark model, has inferior predictive performance explaining only 47 circular are predictive of spread but in a varying degree. The stability of the results is studied. The usage of random forest can speed up investment decisions in the catastrophe bond industry.